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Price weight; market efficiency; performance of stocks

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1. You have decided to construct your own index to measure consumer confidence. You have chosen the following three companies Wal-Mart Stores Inc (WMT), Target Corp (TGT) and Kroger Co. (KR). Using monthly prices from August 2008 through August 2010, Construct both a price weighted and value weighted index. Use a beginning index of 100 where appropriate. What are the monthly returns for your two indexes? Compare your returns to the DJIA and S&P 500 respectively. Do you have any comments on the returns?

2. Discuss your belief on the concept of market efficiency. Do you believe markets are efficient? What are the implications of your belief? Whether you believe markets are efficient or not, explain how market anomalies can persist over time. How does behavioral finance issues impact the concept of market efficiency?

3. Select any publicly traded company you like. Find that company on the yahoo finance site or any other site you prefer. Using the basic technical analysis tab, compare your company to the S&P 500 index and a competitor over the past year. How would you describe the performance of your stock relative to these two benchmarks?

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Solution Summary

This post has a multiple queries. It shows how to calculate price weighted and value weighted index. It discusses concept of market efficiency. It shows how to describe the performance of stock. Using data of WMT, TGT, KR etc.

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You have decided to construct your own index to measure consumer confidence. You have chosen the following three companies Wal-Mart Stores Inc (WMT), Target Corp (TGT) and Kroger Co. (KR). Using monthly prices from August 2008 through August 2010, Construct both a price weighted and value weighted index. Use a beginning index of 100 where appropriate. What are the monthly returns for your two indexes? Compare your returns to the DJIA and S&P 500 respectively. Do you have any comments on the returns?
Indices are constructed in Excel. Formula used and values are presented in the Excel file. Monthly returns of the four indices i.e. WTK price weighted index, WTK value weighted index, DJIA and S&P500 index are shown in the following graph.

We can clearly see from the graph that return on the four indices follows the same pattern in general. The consumer confidence was negative during the period from Sept 2008 to Feb 2009. Then, it entered a slight positive phase and remained so till April 2010. Since, then it is oscillating between positive and negative.
The descriptive statistics for the four indices is presented in the following table:
Monthly Return WTK Price Weighted Index WTK Value weighted Index DJIA S&P500
Max 10.00% 7.64% 8.58% 9.39%
Min -13.81% -15.22% -14.06% -16.94%
Average -0.30% -0.35% -0.39% -0.59%
Standard Deviation 5.29% 4.95% 6.36% 7.06%

DJIA is a price weighted index and S&P500 is a value weighted index, hence I expected that the return on WTK price weighted index would resemble more with that on the DJIA. Similarly, I expected that the return on WTK value weighted index would resemble S&P500. The results are in-line with the expectation. The average returns on value weighted indices have been slightly lower than the average ...

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